I find it fascinating that the process for setting marketing budgets for most organizations is archaic and based on tradition vs. good practice. There are two fundamental flaws. First, your marketing budget, which includes those investments spent to keep current customers and find new ones, should not be financed by short-term debt. Second, your marketing budget should NOT be set as a % of sales. I propose that your marketing investment needs to be set as a function of your BHAG!
I was sitting in a seminar digesting altoids and trying to understand the global financial crisis and the real estate meltdown. It hit me when one of my former business school finance professors talked about the fundamental problem of financing long-term assets with short-term debt. If you finance a long term asset with a short term loan, you will have to refinance at some point. Interest rates could move against you or markets could dry up (like we have seen recently) or the asset value could drop (making it difficult to refinance). When you do this, you run the risk of losing your long-term assets when the bank decides not to renew your short-term debt. Many businesses are currently being forced to shut their doors for this very reason.
In other words, I am talking to the CMO who is facing a doubting CEO. I am talking to CEO’s and management teams that face a doubting board. You need to match the duration of your financing with the duration of your assets. In other words, you need to match the duration of your marketing investment with the duration of your brand. How long do you expect your brand to last? I understand how easy it is to cut the marketing budget. How many times has a cut in the marketing budget actually increased the value of the organization or decreased the likeliness that the company will be stronger in the future? I cannot find any evidence. I see a cut in the marketing budget to be short-sighted and made out of fear which results in a slow down in growth.
If your marketing budget is the vehicle that creates, maintains and grows the value an organization, why would you risk setting your budget on a quarterly and for some monthly basis? I am not saying that organizations should move marketing investments to different vehicles. I am saying that if you are not committed to investing in your most important asset (your brand) over the long-term, you may just be setting yourself up for disaster especially when there is a downturn in the economy.
I am also amazed that most marketing resources recommend that companies should set budgets based upon a % of sales. Guess what happens when sales fall? You guessed it, the marketing investment also declines. This can create the death spiral. When sales fall for growth companies, this should NOT be attributed to marketing saturation. In fact, I would argue that a sales decline is more likely due to companies missing the need in the market place, failing to execute, lacking a marketing plan that is thorough, insightful and actionable and lacking focus.
One of the strategies that is better than a percentage of sales is to estimate what your direct competitors spend in marketing support and then try to at least match that amount. While this may be a better strategy, I do not agree that this is the best alternative. See my blog entitled, General Motors Case Study on Marketing Strategy . GM has lost over 25 points of market share during the last 26 years (1982 to 2008). GM spent $3.0B in advertising in 2008 vs. Toyota’s $1.76B and GM’s market share FELL by 4.5 points and Toyota’s rose by 1.2 points. Why would Toyota match GM’s marketing budget?
My recommendation is to set your marketing budget based upon your strategic marketing growth plan. Do you have a BHAG (Big Hairy Audacious Goal) to hit over the next 10 years? What does this look like in regards to geography, employees, revenues, markets served? I met an amazing entrepreneur last week, Henry McGovern. Henry went to Eastern Europe in 1992 with nothing but a tennis racket. Then he started a company that became a billion dollar business. Henry started AmRest (WSE: EAT),the largest independent restaurant operator in Central and Eastern Europe. Henry now has over 400 restaurants and over 16,000 employees. He shared with me his BHAG: “To the be the largest restaurant company in the world”. He started with a tennis racket. Dream Big, Plan Big, Get Big.
What are your 3-5 year growth goals? Do you have this number in mind? How many units do you need to sell? What new products do you need to deliver? What team do you need in place? What will it take in resources to support your growth goals and hit your plan? Your marketing investment (much better term than “marketing budget”) needs to be based upon your strategy to hit your growth plan. In order to hit your BHAG and your 3 year goal, you need to determine what you need to hit this year to be on track. To hit this year, you need to have a 90 day plan. If you do not hit your plan, are you going to reduce your investment?
Especially during this time of uncertainty, are you planning on a growth strategy that made you successful in the first place? Do you believe in your business? If you do, your marketing investment needs to be tied to your BHAG.